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The Definitive Guide to Investment Costs
Nerina Visser
ETF Strategist
etfSA.co.za
JSE Power Hour
11 April 2019
Components of Investment Costs
Product
Acquisition
Admin/Platform
Advice
What else?
Product Costs
What does it cost to “produce” the investment product?
“Produce” Initial cost to create it?
– not my monkey, not my circus
– product provider must pay (hold that thought…)
Ongoing cost to maintain it
TER (Total Expense Ratio)
+ TC (Transaction Costs)
= TIC (Total Investment Charge)
Fixed costs Trustee fee; audit fee; regulatory charges; licensing fees, etc.
The smaller the fund, the bigger this is as a % of fund size
Variable costs ManCo fee (issuing company) – relatively small, and standard
Asset management fee – varies significantly according to investment style, incl. active vs. index-tracking
Performance fee – can be significant, especially if the ‘hurdle’ is inappropriate
Index licensing fee for index tracking funds – small, but still
Total Expense Ratio (TER) - what’s in it?
CIS (Collective Investment Scheme – unit trust) basics:
Note: only calculated after 12 months
Total Expense Ratio (TER) – example
Illustrative example
Expenses CIS fund
Fixed costs p.a. (independent of AUM)
Trustee Fee R 300 000
Audit fee R 200 000
Variable costs (bps – based on AUM)
ManCo Fee 25
Asset manager 10-150
Total TER (%)
CIS (Collective Investment Scheme – unit trust) basics:
Note: only calculated after 12 months
Total Expense Ratio (TER) – example
Illustrative example
Expenses CIS fund R50m
Fixed costs p.a. (independent of AUM) 1%
Trustee Fee R 300 000
Audit fee R 200 000
Variable costs (bps – based on AUM) 0.35%-1.75%
ManCo Fee 25
Asset manager 10-150
Total TER (%) 1.35%-2.75%
CIS (Collective Investment Scheme – unit trust) basics:
Note: only calculated after 12 months
Total Expense Ratio (TER) – example
Illustrative example
Expenses CIS fund R50m R500m
Fixed costs p.a. (independent of AUM) 1% 0.1%
Trustee Fee R 300 000
Audit fee R 200 000
Variable costs (bps – based on AUM) 0.35%-1.75% 0.35%-1.75%
ManCo Fee 25
Asset manager 10-150
Total TER (%) 1.35%-2.75% 0.45%-1.85%
CIS (Collective Investment Scheme – unit trust) basics:
Note: only calculated after 12 months
Total Expense Ratio (TER) – example
Illustrative example
Expenses CIS fund R50m R500m R5bn
Fixed costs p.a. (independent of AUM) 1% 0.1% 0.01%
Trustee Fee R 300 000
Audit fee R 200 000
Variable costs (bps – based on AUM) 0.35%-1.75% 0.35%-1.75% 0.35%-1.75%
ManCo Fee 25
Asset manager 10-150
Total TER (%) 1.35%-2.75% 0.45%-1.85% 0.36%-1.76%
Total Expense Ratio (TER) comparison
Illustrative example
Expenses Actively managed CIS
Fixed costs p.a. (independent of AUM)
Trustee Fee R 300 000
Audit fee R 200 000
Index calculation fee
Listing fees
Variable costs bps (based on AUM)
ManCo Fee ≈25.0
Asset manager >>10.0
Index tracking license fee
Total Expense Ratio (TER) comparison
Illustrative example
Expenses Actively managed CIS Index-tracking CIS
Fixed costs p.a. (independent of AUM)
Trustee Fee R 300 000 R 300 000
Audit fee R 200 000 R 200 000
Index calculation fee R 100 000
Listing fees
Variable costs bps (based on AUM)
ManCo Fee ≈25.0 ≈25.0
Asset manager >>10.0 10.0
Index tracking license fee 2.0
Index-tracking ETF should be the most expensive…
…but it is not!
Total Expense Ratio (TER) comparison
Illustrative example
Expenses Actively managed CIS Index-tracking CIS Index-tracking ETF
Fixed costs p.a. (independent of AUM)
Trustee Fee R 300 000 R 300 000 R 300 000
Audit fee R 200 000 R 200 000 R 200 000
Index calculation fee R 100 000 R 100 000
Listing fees R 50 000
Variable costs bps (based on AUM)
ManCo Fee ≈25.0 ≈25.0 ≈25.0
Asset manager >>10.0 10.0 10.0
Index tracking license fee 2.0 2.0
Total Expense Ratio (TER)Top 40 ETFs
ETFs Basis points (%)
Satrix 40 10 0.10%
Ashburton Top 40 15 0.15%
Sygnia Itrix Top 40 16 0.16%
Stanlib Top 40 29 0.29%
Average of all local ETFs 31 0.31%
Average of all local Index-tracking Unit Trusts 73 0.73%
Average of all SA General Equity Funds 154 1.54%
Source: ProfileData; etfSA.co.za from ETF Issuer fact sheets, Feb-19
Targeted TERHow does that work?
ETF is launched with an intended (target) TER
Daily pricing of ETF accrues 1/365th of target TER
At the end of one year (365 days) the actual TER will equal the target TER
In terms of actual costs incurred: ETF issuer receives the accrued amount of expenses
ETF issuer pays the actual costs
ETF issuer subsidises the shortfall
Total Expense Ratio (TER)Average Total Expense Ratios (TER)
ETFs Basis points (%)
Satrix 40 10 0.10%
Ashburton Top 40 15 0.15%
Sygnia Itrix Top 40 16 0.16%
Stanlib Top 40 29 0.29%
Average of all local ETFs 31 0.31%
Average of all local Index-tracking Unit Trusts 73 0.73%
Average of all SA General Equity Funds 154 1.54%
Source: ProfileData; etfSA.co.za from ETF Issuer fact sheets, Feb-19
Total Expense Ratio (TER)Average Total Expense Ratios (TER)
ETFs Basis points (%)
Satrix 40 10 0.10%
Ashburton Top 40 15 0.15%
Sygnia Itrix Top 40 16 0.16%
Stanlib Top 40 29 0.29%
Average of all local ETFs 31 0.31%
Average of all local Index-tracking Unit Trusts 73 0.73%
Average of all SA General Equity Funds 154 1.54%
Source: ProfileData; etfSA.co.za from ETF Issuer fact sheets, Feb-19
But the TER does not include all the costs!
Total Expense Ratio (TER)Average Total Expense Ratios (TER)
ETFs Basis points (%)
Satrix 40 10 0.10%
Ashburton Top 40 15 0.15%
Sygnia Itrix Top 40 16 0.16%
Stanlib Top 40 29 0.29%
Average of all local ETFs 31 0.31%
Average of all local Index-tracking Unit Trusts 73 0.73%
Average of all SA General Equity Funds 154 1.54%
Source: ProfileData; etfSA.co.za from ETF Issuer fact sheets, Feb-19
Level of activity determines the amount of trading costs
Adding Trading Costs (TC)
Illustrative example
Expenses Actively managed CIS Index-tracking CIS Index-tracking ETF
Fixed costs p.a. (independent of AUM)
Trustee Fee R 300 000 R 300 000 R 300 000
Audit fee R 200 000 R 200 000 R 200 000
Index calculation fee R 100 000 R 100 000
Listing fees R 50 000
Variable costs bps (based on AUM)
Manco Fee ≈25.0 ≈25.0 ≈25.0
Asset manager >>10.0 10.0 10.0
Index tracking license fee 2.0 2.0
Trading costs medium-ultra high low-medium minimal
…but the level of activity varies
All Investing is Active…
Highest activity levelLowest activity level
Rules-basedActive Skill
Div+, RAFI, Low volatility,
etc.
Top-down
TraditionalActive Skill- Value Investing- Growth/Momentum- etc.
Bottom-up
Traditional‘Passive’- Market cap
weighted indices(eg S&P500, FTSE100,
Top40, etc.)
Low-churn
Buy & Hold
Passive Dynamic Active‘Active’
‘InnovationCreep’
through‘smart’ indices
& ETFs
Highest trading costLowest trading cost
The Activity-Cost Gradient
Passive
costs less than
Active
The Activity-Cost Gradient
Buy & Hold Passive
costs less than
So-called Passive
costs less than
Active
doesn’t exist
The Activity-Cost Gradient
Buy & Hold Passive
costs less than
So-called Passive
costs less than
Rules-based Active
costs less than
Traditional Active
doesn’t exist
‘smart’ beta
But TIC is not the full story!What else affects “product costs”?
Cash flows!
New investments into the fund
requiring the creation of units
or
Withdrawals from the fund
requiring the redemption of units
Primary market operations
What does it cost to invest R100m in the All Share Index at 5bps brokerage?
0
5
10
15
20
25
30
35
STT Statutory charges Brokerage
How big is impact of cash flows?
Basket of ALSI shares
Gross investment amount R 100 000 000
Brokerage (5 bps - 0.05% + VAT) R 57 500
JSE fees & levies R 6 855
STT* (only buy) R 250 000
Net investment amount R 99 685 645
Total cost of investment (bps) 31.1
* STT: Securities Transfer Tax = 0.25% non-negotiable
0
10
20
30
40
50
60
70
80
90
100
STT Statutory charges Brokerage
R100m lump sum (31.1 bps)
How big is impact of frequent periodic cash flows?
Source: JSE / Strate data; etfSA calculations
R100m lump sum (31.1 bps) vs. 4 flows of R25m each (33.6 bps)
How big is impact of periodic cash flows?
0
10
20
30
40
50
60
70
80
90
100
STT Statutory charges Brokerage
0
10
20
30
40
50
60
70
80
90
100
STT Statutory charges Brokerage
Source: JSE / Strate data; etfSA calculations
0
10
20
30
40
50
60
70
80
90
100
STT Statutory charges Brokerage
R25m lump sum (33.6 bps)
Small, frequent periodic cash flows have significant cost implications
Source: JSE / Strate data; etfSA calculations
R25m lump sum (33.6 bps) vs. 5 flows of R5m each (100.8 bps)
Small, frequent periodic cash flows have significant cost implications
0
10
20
30
40
50
60
70
80
90
100
STT Statutory charges Brokerage
0
10
20
30
40
50
60
70
80
90
100
STT Statutory charges Brokerage
Source: JSE / Strate data; etfSA calculations
Who pays for this?(primary market operations)
CIS (unit trust) It is deemed a capital event
i.e. it is not included in the TER or the TIC
It reduces the NAV, so affects performance over time
All existing / remaining investors!
0
10
20
30
40
50
60
70
80
90
100
R100m lump sum 4 x R25m 5 x R5m
Tota
l Tra
nsa
ctio
n C
ost
s (b
ps)
Securities Transfer Tax (STT) Statutory charges Brokerage
Impact of cash flows on(index tracking) unit trusts
The costs of investing daily
cash flows are not included in the TER or TIC, but
negatively affect the NAV price
Source: JSE / Strate data; etfSA calculations
Who pays for this?(primary market operations)
CIS (unit trust) It is deemed a capital event
i.e. it is not included in the TER or the TIC
It reduces the NAV, so affects performance over time
All existing / remaining investors!
ETF (Exchange Traded Fund) Done by the market maker on behalf of ETF provider / issuer
Costs are incurred outside the fund
Costs are absorbed by the issuer, not by the investors
Let’s observe the evidenceWhy does an index-tracking unit trust underperform an ETF, from the same issuer, that track the same index?
For example – three years to 8-Apr-19 (source: ProfileData):
Satrix Top40 ETF(A): 7.29% p.a. vs.
Satrix 40 Index Fund(A1): 6.85% p.a. (0.44% p.a.)
Satrix RAFI40 Total Return ETF(A): 11.19% p.a. vs.
Satrix RAFI40 Index Fund(A1): 10.63% p.a. (0.56% p.a.)
Satrix Divi+ ETF(A): 13.24% p.a. vs.
Satrix Dividend+ Index Fund(A1): 12.75% p.a. (0.49% p.a.)
It’s all about the trading costs associated with investment flows –depends on
Frequency and size of cash flows
Churn (turnover) rate
Final thoughts on TER
You can’t avoid it
You can’t negotiate it
BUT you can choose lower costs Consider cost of making a change (rather deploy new money)
Beware of switching “penny-wise / pound-foolish”
TER is not a cash flow expense (you won’t see it in rands and cents in any investment statement)
TER is already in price that you pay
THUS, it affects your returns
Acquisition Costs
Transaction costs Initial buy
Reinvestment of dividends (after DWT*)
Selling / switching
What are the components Trading costs, incl. brokerage & statutory charges
Bid-offer spread
Possible CGT**
* DWT: Dividend Withholding Tax = 20%, non-negotiable
** CGT: Capital Gains Tax = max 18%, non-negotiable but variable
Replicating the ETF portfolio – not advisable
Buying & selling 40 individual shares rather than 1 ETF is a LOT more expensive…
The cost of a DIY share portfolio
Basket of Top 40 shares
Gross investment amount R 100 000
Brokerage (0.5% + VAT) R 575
JSE fees & levies R 443
STT (only buy) R 250
Net investment amount R 98 732
Total cost of investment 1.3%
Replicating the ETF portfolio – not advisable
Buying & selling 40 individual shares rather than 1 ETF is a LOT more expensive…
The cost of a DIY share portfolio
Basket of Top 40 shares Top 40 ETF
Gross investment amount R 100 000 R 100 000
Brokerage (0.5% + VAT)* R 575 R 575
JSE fees & levies** R 443 R 11
STT (only buy) R 250
Net investment amount R 98 732 R 99 414
Total cost of investment 1.3% 0.6%
* etfSA.co.za brokerage is only 0.08%+VAT – less than R1 per R1,000** Statutory charges are shared amongst all investors on the day due to bulking
…especially if your investment amount is relatively small (retail investors)
0%
20%
40%
60%
80%
100%
R 500 R 1 000 R 5 000 R 10 000 R 50 000 R 100 000 R 500 000 R 1000 000
Tota
l cost of
investm
ent
Investment amount
Top 40 basket Top 40 ETF
Replicating the ETF portfolio – not advisableThe cost of a DIY share portfolio
10.3% for R5 000!
Acquisition CostsDifferent cost models
Percentage, e.g. etfSA.co.za: 0.092%
EasyEquities: 0.2875%
Standard Bank OST*: 0.575%, subject to MFC**
Minimum fixed cost SB OST: R57.50 per trade
Negotiable if you trade >R500k p.m.
Withdrawal fee to your bank account: R4.56
Transfer of portfolio: R60.42 per share holding ETC.
All fees incl. of VAT* Online Share Trading ** Minimum Fixed Cost
Acquisition CostsPPF* Model
Are you investing R500 or R50,000 or R5m?
Are you buying 5 ETFs or 50 shares?
Are you compounding (reinvesting distributions)?
Are you a trader or an investor?
Do you have itchy fingers or are you patient with your process?
Compare different models based on your behaviour
* Personalised Pro Forma
Acquisition CostsIndirect costs
Bid-offer spread (also known as the “double”) Difference between buying & selling price – market maker “fee”
Mid of BBO* = NAV**
Beware cents vs. % – which spread is bigger? 245-255
5700-5800
39000-41000
Beware “blind” trading
Mitigate this by dealing with an ETF specialist platform
* Best Bid-Offer ** Net Asset Value
Admin / Platform Costs
% vs. fixed cost base % – you are subsidising small investors
Fixed cost – not suitable for small investments
Beware requirements: No monthly / annual fees IF you maintain a minimum balance, OR trading often enough
What else does it give you? Research? Price feeds? Analytics? Information? Education?
Automation, e.g. debit orders, reinvestment of dividends
Better execution (trading) than DIY?
Admin / Platform Costs
Beware “zero fee” offerings – where else are they making their money?
It is certainly not zero cost for the provider!
Regulatory charges are unavoidable, incl. safe-guarding of your assets and information, reporting (also to you)
Systems; People; Marketing; Overheads… #Eskomplicated
What is fair? Determine what is valuable to you
e.g. personal client service vs. hi-tech
Don’t be naïve
Calculate what you pay in Rands, then decide
Advice Costs
AUM*-based or flat fee
Could be incl. in platform fee, but only if licensed to do so
Is the adviser / advice “fit-for-purpose”? i.e. specialist in what you need
Investments (ETFs, shares, etc.)
Insurance
Financial planning
“Personal trainer”
Commission-earning, blood-sucking leech you’ve never met
“Investments should be bought, not sold” – Buffett
* Assets Under Management
What else?
Performance fees Why pay for the performance someone else got in the past?
Debit order costs R300 p.m. debit order @ R3 d/o fee = 1% PER MONTH
and you were worried about 5 bps difference in the TER?
Tax – is it a cost? It is unavoidable, but it can be mitigated
Make use of tax incentives before discretionary investments (share trading, unit trusts, ETF portfolio, etc.)
All-In Cost ModelTax-Free Investment Account
1% all-inclusive
R33,000 investment = R330
Includes* VAT = R43
Transaction costs = R137 DIY (or R62 expense to FSP**)
Reinvestment of distributions = R679 DIY (or R69 for FSP)
Cost of DIY = R859
Fee earned by administrator = R78 p.a.
Fee earned by FSP = R78 p.a. = R6.50 p.m.* Assume 4 ETFs, 4% DY paid quarterly, 0.25% brokerage rate for DIY** Financial Services Provider
All-In Cost ModelManaged Portfolio Service
1% all-inclusive
R1m investment = R10,000
Includes* VAT = R1,304
Transaction costs = R5,805 DIY (or R1,205 expense to FSP)
Reinvestment of distributions = R2,204 DIY (or R1,101 for FSP)
Admin = R828
Cost of DIY = R10,141
Fee earned by FSP = R5,562 p.a. = R463.50 p.m.
* Assume 5 ETFs, 4% DY paid quarterly, monthly account fee
Glossary of other TLAs*Retirement savings; Insurance-based products
EAC – Effective Annual Cost Investment management Advice Administration Other costs
RSC – Retirement Savings Cost disclosure standard Standardised method of disclosing costs to employers or
trustees who want to compare umbrella funds Not aimed at individual members, but rather decision makers
RIY – Reduction in Yield
IRR – Internal Rate of Return
* Three Letter Acronyms
In conclusion
Know your costs – it matters, a lot!
Understand what is unavoidable, what is negotiable, and what is unnecessary
Focus your efforts on where to be MAD*
Don’t be naïve about claims of “no fees” or “zero costs”
Still not sure what to do?
Invest with the “ETF specialists”
* Make A Difference
Don’t be a
cheapskatewith your investments
Pay a fair price for
quality
Don’t be a
cheapskatewith your investments
Pay a fair price for
quality
Question time
For ETF and index investment insights and news, follow me on Twitter: @Nerina_Visser
Contact Details
Nerina Visser, CFA
ETF Strategist & Advisor
Tel: +27 10 446 0376
Email: [email protected]
Twitter: @Nerina_Visser
etfSA: [email protected] www.etfsa.co.za @etfSA
Disclaimer© etfSA.co.za: The Exchange Traded Products (ETPs) contained herein are mainly Collective Investment Schemes in Securities (CIS) and other listed securities which are generally medium to long-term investments that contain elements of risk and can be affected by market values, interest rates, exchange rates, volatility, dividend yields and issuer credit ratings. ETPs are listed on the Johannesburg, or other Stock Exchanges, and trade at ruling prices on such Exchanges.The price of ETPs can go up as well as down and past performance is not necessarily a guide to the future. The ETPs herein are listed on the Johannesburg Stock Exchange Limited and trading in ETP securities will incur trading and settlement costs. ETF securities are traded at ruling prices and can engage in scrip lending.The information and opinions provided herein are of a general nature and do not constitute investment advice. Whilst every care has been taken, no representation, warranty or undertaking, expressed or implied, is given as to the accuracy or completeness thereof.etfSA.co.za is managed by M F Brown, who is a registered financial services provider (FSP No. 39217). M F Brown has ProfessionalIndemnity Insurance as required by FAIS.The etfSA Investment Services Company (Pty) Ltd (FSP No 40107) provides asset management as well as financial intermediary and advice services. It uses Exchange Traded Products to construct portfolios for use in Retirement Annuity, Tax Free and Discretionary investments. It holds Professional Indemnity insurance and Fidelity Guarantee insurance as required by FAIS.All opinions and information in this document may be changed at any time without notice. Redistribution, reproduction, the resale or transmission to any third party of the contents of this document, whether by email, newsletter, internet or website, is only possible with the written permission of etfSA.etfSA.co.za, its sponsors, administrators, contributors and product providers disclaim any liability for any loss, damage, or expense that might occur from the use of or reliance on the data and services provided through this document.etfSA.co.za® and etfSA The Home of Exchange Traded Funds® are registered trademarks in the Republic of South Africa.